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What are offer contingencies when buying a home?

When buying a home, you can include contingencies in your offer, which will allow you to walk away from the purchase if the conditions in the contingency are not met. Common contingencies are appraisal contingency, financing contingency, and home inspection contingency. You can read more about these contingencies below.

Contingencies are intended to protect the interest of the buyer, but if you include too many contingencies in an offer and you are in a seller's market, they might impact the seller's choice in whose offer to select. If a contingency is not met within the timeline specified in your offer, you can safely back out of the sale without incurring any losses. However, if all of the contingencies are met, and you still choose to back out of the sale, you will lose your earnest money or potentially face a lawsuit.

In this article, we will look at some of the most common contingencies in real estate.

Home Inspection Contingency

Including a home inspection contingency — also known as the due diligence contingency — in your offer will protect you if the home inspection finds issues that need to be handled. If the damages are too extensive, you can safely walk away from the purchase. You can also negotiate more if repairs are necessary. This can lead to delays in closing on the home sale, but getting these issues fixed now means you will not have to worry about them later.

Even if you feel pressured to skip the inspection contingency, that is highly risky to do if there are any issues that come up. However, in a sellers’ market there are times when a home inspection won’t be tolerated. In this instance, you either have to risk buying the home without a home inspection, or you can try and do a pre-inspection where you have an inspection done before even writing your offer.

Mortgage Financing Contingency

The mortgage financing contingency — also known as the financing contingency — is an important contingency to include if you need a mortgage loan. Being pre-approved for your mortgage loan is not a 100 percent guarantee that you will be able to get the loan. Including this contingency means that once your loan goes into underwriting, if you cannot get loan approval, you will be able to walk away from the sale.

In the mortgage contingency, you will specify a time period for you to obtain financing from the bank. If you are unable to do so, you can back out of the contract or attempt to renegotiate the price of the home.

Home Appraisal Contingency

If you are getting a mortgage loan, your bank will most likely require you to get the home appraised. Without an appraisal contingency, if your offer ends up being more than the appraisal value, you will have to pay the difference yourself. Getting the appraisal contingency will also allow you to attempt to renegotiate the price or walk away if the appraisal value is lower than your offer.

Home Sale Contingency

If you currently own a home that you are selling while simultaneously buying a new one, you can include a home sale contingency in your offer. This will give you a set amount of time, usually between 30 and 60 days, for you to sell your current home before closing on your future home. If the house is not sold in time, your offer will expire, and you may need to renegotiate with the seller or look for a different home.

If you are in a seller's market, this is a risky contingency to include. If your offer is just as good as another person's offer, but you include a home sale contingency, and the other buyer does not, the seller is most likely going to choose to go with that person.

The Kick-Out Clause

If you include a home sale contingency in your offer, a seller can add a kick-out clause to the contract. This clause gives them a little more protection. Under a kick-out clause, the seller can continue to keep their property on the market, and if another offer comes in, then the seller can then give you time to remove the house sale contingency from your offer or to cancel the offer completely. The seller can then sell the home to the new buyer.

About the Author

Auz Burger is a freelance writer who specializes in real estate. She has a BA from Washington State University and has been writing and editing professionally for over a decade.